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Ukraine – a Budding Destination for Your Shared Service ... · PDF fileRelatively low...
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Ukraine – a Budding Destination for Your Shared Service CenterNovember 2017
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Contents
Ukraine as a location for SSC compared to the neighbouring countries 03
Approach 04
Methodology 05
Category assessment: Human resources 06
Category assessment: Infrastructure 07
Category assessment: Risks 08
Category assessment: Taxation & incentives 08
Category assessment: Operating environment 09
Category assessment: Location appeal for residence 09
Examples of operating SSCs in Ukraine 10
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Ukraine as a location for SSC compared to the neighbouring countriesPractices of developing Global Shared Service Centers (hereinafter, SSCs) reveal a significant potential for Eastern and Central European countries, thus we have performed a research to compare the advantages of Ukraine against those countries.In recent years, Ukraine has moved toward integration into the global economy, thus it signed the EU-Ukraine Association Agreement, adopted a visa-free regime with the European Union (hereinafter, the EU) and entered into a free trade agreement with Canada. Moreover, large international companies have started to establish its production sites in Ukraine. The country has succeeded significantly in the development of over 1,000 IT outsourcing companies that serve various North American and European companies and employ over 100,000 people. Yes, Ukraine has a vast untapped potential that is expected to be realised in the upcoming years. Nonetheless, each country of Eastern and Central Europe offers its own advantages, and the choice of a right site location for SSC depends on the combination of criteria considred to be the most critical for each organization.
Labor force with advanced education is considered to be one of the key criteria for selecting a site location for SSC. The countries leading as per this criterion include Turkey (23.3 m), Ukraine (16.7 m), Poland (14.8 m), and Romania (7.7 m). Moreover, a higher education enrollment rate in each country enables a continuos supply of competent labor force.
Country's average salary rate is yet another important criterion for choosing a right site location for SSC. In 2017, Ukraine has the lowest country's average salary rate which equals to €286 per month, with a 33% decrease since 2012. By 2020, country's average salary rate in Ukraine is expected to increase by 16%. In the meantime, country's average salary rates in the EU are significantly higher, e.g., €896 per month in Romania and €1,127 in Poland, and they are expected to grow at a moderate rate.
Relatively low tolerance level for corruption and political, operational, security, economic, tax, and legal risks are historically attributable to the Baltic States, such as Estonia, Latvia, and Lithuania. Those countries also have attractive conditions for doing business, particularly due to the advantageous taxation terms and higher safety rating due to a low level of crime.
The number of Shared Service Centers implemented by global companies is continuously growing. As such, Poland and Romania have already developed a substantial SSC implementation practice. Ukraine has only a few operating SSCs so far, though more and more companies tend to consider Ukraine as a SSC site location with a vast potential.
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Approach
We have performed a research on 15 countries in Eastern and Central Europe, as they are deemed comparable in terms of the economy and market
UkrainePoland
Turkey
Estonia
Moldova
Bulgaria
Romania
The FYR of Macedonia
The Czech Republic
Latvia
Lithuania
Croatia
Slovakia
Serbia
Hungary
Our research is based on open-source information, such as reports published by World Bank, Organization for Economic Co-operation and
Our research has been limited to matters which we have identified to appear to us to be of significance in the scope of our research, and information available
We have used six criteria categories to compare the selected countries, including human resources, infrastructure, risks, taxation and incentives, operating
development level, geopolitical position, as well as existing SSC implementation practice.
Development, Transparency International, National Statistical Committees, the Economist Intelligence Unit, and International Telecommunications Union, as well as other publicly available data.
environment, and location appeal for residence.
to us in open sources. Given these circumstances, our research may not be comprehensive, as we may not have become aware of all the information that may be deemed relevant. No party is entitled to rely on the research for any purpose, and we accept no responsibility or liability to any party whatsoever, in respect of the research.
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We have used six dimensions combining qualitative and quantitative characteristics to determine a location’s 'business fit' in function of each company’s specific SSC requirements. We have performed a retrospective data analysis within a 5-year horizon and compared the last available data against the data for 2012, except for the criteria where no data for 2012 were available. The criteria analysis is presented in terms of top 5 countries with the most favorable conditions, additionally including Poland and Romania due to the continuous growth of Shared Service Centers in those countries over the recent years.Though, in the mid- to long-term perspective, qualitative dimensions are more important to the success of SSC than costs, in the short-term perspective, human resources cost is often deemed to be a key dimension influencing a decision on SSC site selection. As such, a forward-look on country's average salary rates has been performed to highlight the expected changes in the upcoming years.
Methodology
Category Criteria Comparable data
Human resources • Country's average salary rate, € per month* • Labor force with advanced education, m • Higher education enrollment rate, %
• 2020 and 2017 vs 2012 • 2015 vs 2012 • 2015/2014 vs 2012
Infrastructure • Prime office rent, € per sq. m. • Fixed-broadband subscriptions, % • Average Internet speed for country, kbps
• 2017 vs 2012 • 2016 vs 2012 • 2017 vs 2012
Risks • Country Safety Index, scores • Global Insight Country Risk Ratings, points
• 2017 vs 2012 • 2016 vs 2012
Taxation & incentives • Paying Taxes - Doing Business, rank • 2016 is covered within the report issued
in 2017 vs 2012 covered within the report issued in 2013
Operating environment • Corruption Perceptions Index, scores • Doing Business, rank
• 2016 vs 2012 • 2016 is covered within the report issued in 2017 vs 2012 covered within the report issued in 2013
Location appeal for residence • Social Progress Index, scores • 2016 is covered within the report issued
in 2017 vs 2014 covered within the report issued in 2015
* Сountry's average salary rate for each country was adjusted for applicable labor tax and contribution rates paid by employers.
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Country's average salary rate in Ukraine is €286 per month in 2017, which is the lowest average salary rate compared to Moldova (€305), the FYR of Macedonia
(€546), Bulgaria (€581), Serbia (€622), Romania (€896), and Poland (€1,227). Country's average salary rate in Ukraine has decreased by 33% since 2012, resulting from a significant national currency depreciation due to a political and economic turmoil. One should note that the economic situation began to stabilize in 2016, which resulted in GDP growth and stabilization of Ukrainian Hryvnia. Country's average salary rate in Moldova has grown by 8% since 2012, in the FYR of Macedonia – by 10%, in Bulgaria – by 32%, in Serbia – by 4%, in Poland – by 21%, and has decreased by 6% in Romania. By 2020, country's average salary rates are expected to grow by 26% in Romania, by 22% – in Bulgaria, by 16% – in Ukraine, and by 8% – in Poland.
Labor force with advanced education in Ukraine amounted to 16.7 m people in 2015, which is the
second largest figure after Turkey (23.3 m), and followed by Poland (14.8 m), Romania (7.7 m), and the Czech Republic (4 m). Labor force with advanced education has grown by 9% in Turkey since 2012, by 3% – in Romania, by 2% – in the Czech Republic and by 1% – in Poland. No comparative data for Ukraine in 2012 is available.A significant increase in labor force with advanced education in Turkey has been influenced by the continuous growth in young population, partially due to the receipt of refugees, as well as a shift in the government's education policy.
Higher education enrollment rate in Ukraine reached 82% in 2015, which is the second highest level after Turkey (95%), followed by Bulgaria (74%), Estonia
(70%), Croatia (69%), Poland (68%), and Romania (53%). Higher education enrollment rate is not only the highest in Turkey, but it has also shown a sufficient increase by 26 pp since 2012 due to the government's education policy shift. Meanwhile, higher education enrollment rate has grown by 11 pp in Bulgaria, by 7 pp – in Croatia, and less than 1 pp in Ukraine, and has decreased by 2 pp – in Estonia and Romania and by 5 pp – in Poland. In Ukraine, about 253 thousand students enrolled to higher educational institutions in 2016, and 319 thousand students obtained Bachelor’s degrees, whereas approximately 37% completed social and business area programs and 17% – engineering ones.
Category assessment: Human resources
Ukraine
Turkey
Croatia 2015: 69%2012: 62%
Bulgaria 2015: 74%2012: 63%
2014: 82%2012: 82%
2015: 95%2012: 69%
Estonia
Romania
Poland
2015: 70%2012: 72%
2015: 53%2012: 55%
2014: 68%2012: 73%
The CzechRepublic
Romania
Turkey
Ukraine
2015: 4 m2012: 3.9 m
Poland 2015: 14.8 m2012: 14.6 m
2015: 23.3 m2012: 21.2 m
2015: 16.7 m2012: n/a
2015: 7.7 m2012: 7.5 m
Ukraine
Moldova
Bulgaria
The FYRof Macedonia
Serbia
Romania
2017: €2862012: €417
2020: €330
2017: €5462012: €498
2020: n/a
2020: n/a
2020: n/a
2020: €709
2020: €1,128
2020: €1,331
2017: €5812012: €441
2017: €6222012: €599
2017: €8962012: €954
Poland 2017: €1,2272012: €1,017
2017: €3052012: €283
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Prime office rent in Ukraine amounts to €17 per sq. m. in 2017 and is higher than in Bulgaria (€10), the FYR of Macedonia, and Moldova (€13), Slovakia,
Croatia, and Poland (€14), and Romania (€15). Enhancing business activity in Ukraine as well as decrease in vacancy rate in Kyiv may drive rent prices up. Rental rates in Warsaw (Poland) are expected to remain relatively stable due to both strong construction activity in respect of office spaces and a high demand from tenants. Prime office rent in Bucharest (Romania) is likely to increase due to the simultaneous growth in business activity in IT and BPO&SSC sectors as well as office supply due to a moderate level of the construction activity. Rental rates in Bratislava (Slovakia) are expected to remain stable due to both growing business activity and leasable area capacity. Prime office rent in Sofia (Bulgaria), Skopje (the FYR of Macedonia), Chisinau (Moldova), and Zagreb (Croatia) are likely to remain relatively stable due to a moderate level of economу growth, and an expected slight increase in the office premises supply.
Fixed-broadband subscriptions covered 11% of population in Ukraine in 2016, which is the lowest level in comparison with Estonia (31%), Lithuania (30%),
Hungary (29%), the Czech Republic (28%), Latvia (26%), Romania (23%), and Poland (19%). Fixed wired broadband subscriptions include the total number of subscriptions to the following broadband technologies with download speeds of 256 kbit/s or greater: DSL, cable modem, fiber-to-the-home, and other fixed technologies (such as broadband over power lines and leased lines). Fixed-broadband subscriptions in Ukraine, Latvia, and the Czech Republic increased by 3 pp in 2016 in comparison with 2012, in Estonia and Romania – by 5 pp, in Lithuania – by 4 pp, in Hungary – by 5 pp, and Poland – by 1 pp.
Average Internet speed in Ukraine is 12,799 kbps in 2017, which is linferior to Romania (16,990 kbps), the Czech Republic (16,938 kbps), Latvia (16,580 kbps),
Bulgaria (15,540 kbps), and Hungary (14,814 kbps). Yet, Poland has a slower connection of 12,609 kbps. An average Internet speed is dependable on the broadband infrastructure, particularly, fiber-optic networks built within the country. The Internet speed in Ukraine has grown by 167% since 2012, while in Romania – by 142%, in the Czech Republic – by 146%, in Latvia – by 91%, in Bulgaria – by 159%, in Hungary – by 187%, and in Poland – by 182%.
Category assessment: Infrastructure
Bulgaria
The FYRof Macedonia
Moldova
Slovakia
Croatia
Poland
Romania
2017: €102012: €16
2017: €132012: €13
2017: €142012: €15
2017: €142012: €16
2017: €142012: €17
2017: €152012: €18
Ukraine2017: €172012: €26
2017: €132012: €16
Romania
Hungary 2017: 14,814 kbps2012: 5,150 kbps
Latvia 2017: 16,580 kbps2012: 8,674 kbps
The CzechRepublic
2017: 16,938 kbps2012: 6,885 kbps
2017: 16,990 kbps2012: 7,012 kbps
Bulgaria
Poland
Ukraine
2017: 15,540 kbps2012: 6,000 kbps
2017: 12,609 kbps2012: 4,464 kbps
2017: 12,799 kbps2012: 4,792 kbps
Estonia
Lithuania
Hungary
The CzechRepublic
Latvia
Romania
Poland
2016: 31%2012: 26%
2016: 29%2012: 24%
2016: 28%2012: 25%
2016: 23%2012: 18%
2016: 26%2012: 23%
2016: 19%2012: 18%
Ukraine 2016: 11%2012: 8%
2016: 30%2012: 26%
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Ukraine has scored 50 points out of 100 within Country Safety Index in 2017, which is inferior to Estonia (78 points), Croatia (72 points), Romania and the
Czech Republic (71 point), and Poland (70 points).The Country Safety Index is an estimation of crime level in a given country, where higher scores are attributed to the countries that are considered to be more safe.In 2012, Ukraine scored 45 points, Estonia – 75 points, Croatia – 72 points, Romania – 70 points, the Czech Republic – 63 points, and Poland – 61 points.
Ukraine scored 34 points out of 100 in Global Insight Country Risk Ratings in 2016, while Estonia scored 71 point, Lithuania, Poland, the Czech Republic, Hungary,
and Romania – 59 points. This rating covers political, operational, security, economic, tax, and legal areas as major risk factors. In 2012, Ukraine scored 32 points, Estonia, Lithuania, the Czech Republic and Hungary – 63 points, Poland – 61 point, and Romania – 42 points.
Category assessment: Risks
Estonia
Poland
Ukraine
2017: 702012: 61
Romania 2017: 712012: 70
Croatia 2017: 722012: 72
2017: 782012: 75
The CzechRepublic
2017: 502012: 45
2017: 712012: 63
Estonia
The CzechRepublic
2016: 592012: 63
Lithuania 2016: 592012: 63
2016: 712012: 63
Poland
Romania
Ukraine
Hungary
2016: 592012: 61
2016: 592012: 42
2016: 342012: 32
2016: 592012: 63
Category assessment: Taxation & incentives
The FYRof Macedonia
Moldova
Poland
2017: 312013: 109
2017: 472013: 127
Estonia 2017: 212013: 50
Latvia 2017: 152013: 52
2017: 92013: 24
Lithuania
Romania 2017: 502013: 154
Ukraine 2017: 842013: 165
2017: 272013: 60
Ukraine ranks 84th in Taxation Ranking within the Ease of Doing Business Index 2017, being inferior to the FYR of Macedonia, Latvia, Estonia, Lithuania, Moldova,
Romania, and Poland. In 2016, labor tax and contribution in Ukraine amounted to 22%, whereas in the FYR of Macedonia – 0%, in Latvia – 23.59%, in Estonia – 33.8%, in Lithuania – 31.18%, in Moldova – 27.5%, in Romania – 23.10%, and 16.93% plus 40.65% x 6% x average salary in Poland. Despite the modest ranking position, Ukraine has the lowest number of payments among other countries covered by the research, though quite a long time required for taxes administration adversely affects its ranking. However, one should note a positive dynamics in the index. Ukraine has climbed from position 181 in 2013 to 84 in 2017. Moreover, labor tax and contribution for employers in Ukraine were reduced to 22% of the taxable base in 2016, whereas previously they ranged from 36.76% to 49.7% depending on the class of a professional risk and income above payroll cap.
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Ukraine ranked 131 within Corruption Perceptions Index in 2016, being behind all countries within the research. Nevertheless, Ukraine has climbed
13 positions up since 2012, similar to Estonia, Lithuania, and Latvia (10 positions), Poland (12 positions), Romania (9 positions), and the Czech Republic (7 positions). Despite a political and economic turmoil in Ukraine, moderate changes are taking place, e.g., e-declaration system and electronic system of VAT reimbursement have been launched, electronic tender system ProZorro for state procurement is extensively used.
Ukraine ranks 80 in the Doing Business 2017, being behind all countries within the research. However, one should note a positive dynamics in the index – Ukraine
has climbed from position 137 in 2013 to 80 in 2017, while the FYR of Macedonia has raised from 22 position to 10, Estonia – from 21 to 12, Latvia – from 25 to 14, Lithuania – from 27 to 21, Poland – from 55 to 24, and Romania – from 72 to 36.
Category assessment: Operating environment
Estonia
The CzechRepublic
Romania
Ukraine
2016: 472012: 54
2016: 572012: 66
Lithuania 2016: 382012: 48
Poland 2016: 292012: 41
2016: 222012: 32
Latvia
2016: 1312012: 144
2016: 442012: 54
Estonia
Romania 2017: 362013: 72
Latvia 2017: 142013: 25
Poland 2017: 242013: 55
2017: 122013: 21
The FYRof Macedonia
2017: 102013: 22
Lithuania
Ukraine 2017: 802013: 137
2017: 212013: 27
Category assessment: Location appeal for residence
Ukraine has scored 68 points out of 100 in the Social Progress Index 2017, falling behind the Czech Republic, Estonia, Slovakia, Poland, Latvia, and Romania. Social
Progress Index is an integrated index covering such areas as basic human needs, foundations of wellbeing and opportunities. The main underperforming subareas for Ukraine in this index are environmental quality and personal safety, although Ukraine has slightly outperformed the above-mentioned countries in the access to advanced education.
The CzechRepublic
Latvia
Romania
2017: 792015: 73
2017: 742015: 79
Slovakia 2017: 802015: 79
Estonia 2017: 832015: 81
2017: 842015: 80
Poland
Ukraine 2017: 682015: 65
2017: 802015: 77
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Examples of operating SSCs in Ukraine
NestleIndustry: Consumer productsImplementation date: 2010Location: LvivNumber of employees: >800 Countries serviced by the SSC: More than 30 countries, including the Baltic States, the Adriatic, Scandinavia, North America as well as Russia, Poland, Romania, Hungary, Bulgaria, the Czech Republic, Italy, Greece, Brazil, Colombia, Japan, and other countriesProcesses transferred to the SSC: Finance, Procurement, Other functions
Veon Industry: TelecommunicationsImplementation date: 2016Location: LvivTarget Number of employees: ~900 Countries serviced by the SSC: Ukraine, Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan, Armenia, GeorgiaProcesses transferred to the SSC: Finance, Human Resources, Procurement, Other Functions
AB InBevIndustry: Consumer productsImplementation date: 2009Location: Kharkiv Number of employees: >500 Countries serviced by the SSC: Russia and UkraineProcesses transferred to the SSC: Finance, Human Resources, Procurement, and Logistics
GrumaIndustry: FoodLocation: CherkasyNumber of employees: >25 Countries serviced by the SSC: Gruma EMEA companiesProcesses transferred to the SSC: Finance
Lviv
UzhhorodIvano-Frankivsk
Chernivtsi
Ternopil
Lutsk
Rivne
Kharkiv
DonetskDnipropetrovsk
Zaporizhzhia
Luhansk
PoltavaCherkasy
Kropyvnytskyi
Mykolaiv
Kherson
Simferopol
Odesa
Sumy
Kyiv
Zhytomyr
VinnytsiaKhmelnytskyi
Chernihiv
Source: The companies' websites and other open Internet resources
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Vladimir Vakht Partner,[email protected]+38 (044) 490 90 00
Vladimir Yumashev Partner,Tax & [email protected]+38 (044) 490 90 00
Nazar Farmaha Director,[email protected]+38 (044) 490 90 00
Vadym Kapshtyk Senior Business Analyst,Research and [email protected]+38 (044) 490 90 00
Nataliia Cheliada Senior Consultant,[email protected]+38 (044) 490 90 00
Oleksandr Golovko Business Analyst,Research and [email protected]+38 (044) 490 90 00
Contacts
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